Over the years government policies have contributed mightily to the American landscape

• The FHA loan program funded the suburban dream
• School desegregation gave rise to white flight
• Interstates made commuting possible
• Rural Electrification made far flung settlements possible
• Federal Housing projects enforced government ghettos

However one of the most powerful but least understood policies affecting cities and suburbs is the property tax structure.

A couple of illustrative examples make the point.

• In Barbados, if you don’t paint your house it’s considered under construction and is taxed at a lower value. Therefore there were plenty of unpainted houses in the country.
• In Philadelphia, houses were taxed by their width; therefore you see a lot of old narrow houses in Philly.

Today, most property taxes are based on the assessed value of a building. This is a progressive tax meant to more heavily tax the wealthy. However, by tying taxes to property value there is a built-in incentive to avoid property improvements. Therefore neighborhoods don’t improve like they might otherwise.

This is bad for both the payer and the collector. It’s expensive to continuously re-assess property values. In fact, it’s so painful, that Trenton rarely does it, making our revenue problem even worse.

Trenton’s property tax rate really hurts

When property values declined as they did in Trenton due to de-industrialization and white flight, the tax rate had to be raised in order to raise revenue. As a result, Trenton now has among the highest tax rates in the state at 4.5% in 2008. The municipal portion of that is 2.5% which excludes county, school and open space tax. By contrast West Windsor’s municipal tax rate is only 0.27%.

It’s fair to compare the effective tax rates for Mercer County municipalities (i.e. once all the assessment discounts and abatements are taken into account). For 2007, Trenton’s effective rate was 2.8% while West Windsor’s was 2.14%. Therefore for the same $400,000 home, taxes are 25% cheaper in West Windsor. It’s a fallacy to suggest that taxes are higher in West Windsor.

The following table shows that Trenton’s effective tax rate in 2007 was the highest in Mercer County. The rate is made up of school, county, library, open space and municipal taxes. Trenton’s municipal tax rate is roughly double that of its nearest competitor Hightstown, though Hightstown’s school tax is higher.

Mercer County 2007 Property Tax Rates

Of course, Trenton could lower its tax rate to better compete but then we wouldn’t be able to pay our bills.

The current proposal for NJ property tax reform is bad for Trenton.

• The general ideal is to pay school costs from state income taxes rather than local property tax.
• If school costs were paid by the state, rich districts like West Windsor would be able to lower property taxes
• There would be no effect on poor districts like Trenton, because the state already pays most of our school costs (90% of them).
• Our income taxes would go up to pay for West Windsor’s schools.
• The net effect would be to drive more suburban sprawl.

A “land based” property tax structure is more urban friendly

A land based tax system would encourage urban development. The system would tax property owners based on the square footage of their land. In its most pure form, every privately owned square foot of Trenton would be taxed at the same rate.

With a land based property tax, owners would no longer be penalized for improving their property. Alternately, a speculator who’s bought a vacant building or land would be penalized in that his land would be highly taxed no matter how worthless it is.

A land based system would lead to dense development

The system would encourage taller buildings that lead to increased density which in turn leads to green development and enhanced retail opportunity.

While it’s generally less expensive to develop a large one story building in a cornfield than a multi-story building in a city, the land based tax begins to level the playing field.

The land based system is democratic

As an example let’s assume 4 of Trenton’s 7.5 square miles are taxable. Given that our property tax revenues are around $100,000,000 (including both city and county taxes) this translates into $.90 per SF. On an average 25’x100’ lot the average Trentonian would pay $2250 per year in property tax.

That’s down for some, up for others.

There are a lot of advantages to this proposal

• The tax structure no longer penalizes property owners for fixing up their home or business.
• It encourages vacant land to be developed and it helps encourage multi-story development.
• A high-rise located on an acre pays the same as a single family home on an acre.
• It makes energy efficient high-rise living comparatively economical.

Immediate effects would be to lower taxes for occupied property and raise taxes on abandoned property. This would chase away speculators by increasing delinquency and resulting foreclosures.

However, in the shift to a radical plan like this, care would need to be taken to not cause mayhem. Changes would need to be gradual. Protections would need to built-in for historic properties. Zoning rules would need to continue to protect property owners.

A more practical approach is to split between land use and value based taxation

This method would more gracefully move us gradually in the right direction. We could apply the land use method only to municipal taxes, thereby simplifying the formulas governing Open Space, County and School taxation. Also, should unintended consequences arise, a split system would allow us to adjust the levers accordingly.

In the Regional Plan Association report, Fundamental Property Tax Reform II: A Guide for Evaluating Proposals, May 2006, the authors evaluated several property tax reform proposals. It scored the split property value and land use tax highly. However the report suggested that implementation would be difficult. Alternatively, the same report scored the current property tax proposal poorly for the same reasons I mention. I suggest that we should pursue the best, not the easiest answer.

I’m proposing this plan to make a point.

We can improve the chances that Trenton re-develops by using all the tools at our disposal, including tax policy. Over time, a property tax structure that encourages rather than discourages dense urban living is required to more appropriately shape NJ’s landscape and strengthen cities like Trenton.

Trenton shouldn’t wait for the state. We should immediately prepare to implement a land based tax system for our municipal taxes.